How To Set Up A ROBS (Rollover For Business Startups)

A Rollover for Business Startups (ROBS) enables you to access the funds in your tax deferred retirement account, like a 401k or traditional IRA, for the purpose of starting or buying a business. However, you must set up a ROBS correctly in order to avoid taxes and early withdrawal penalties.

Setting up a ROBS correctly can be difficult if you don’t have the right provider helping you. Our recommended provider, Guidant, can help you get funded in about 3 weeks. Visit them to schedule a free ROBS consultation.

How to Set Up a ROBS

Setting up a ROBS can be complicated, but ROBS providers, like Guidant, take care of most of the hard work for you. If you’re unfamiliar with ROBS, read our Ultimate Guide to ROBS and come back to this article when you’re ready to get started. Or if you’re ready to move forward you can choose one of our recommended ROBS providers to partner with.

Here are the 8 steps to set up a Rollover for Business Startups (ROBS):

Step 1: Determine if a ROBS is Right for You

You primarily need the following three things to be eligible for a ROBS:

1. A Qualifying Retirement Account

Guidant works with a wide range of retirement accounts, including:

401(k)

403(b)

SEP

TSP

Keogh

Traditional IRAs (Roth IRAs are not eligible)

2. A Minimum of $50,000 in Your Retirement Account

Guidant requires that you have at least $50,000 to rollover. Rolling over less than that wouldn’t be cost effective due to the up front fee and ongoing maintenance fees.

3. Retirement Account Can’t be From a Current Employer

Most employers prohibit you from rolling over a retirement account while you still work for them. You can, however, use a retirement account from a previous employer.

With a ROBS, you don’t have to meet traditional underwriting criteria. There aren’t any credit checks, and you don’t have to worry about collateral, because a ROBS isn’t a loan.

Step 2: Request a Free Consultation with a ROBS Provider

Once you think that a ROBS could be a good fit for you and your business, you should speak to a ROBS professional. Each ROBS is so unique, and structured to meet the demands of your own business and personal situation. You can request a free consultation through whichever provider you choose.

Step 3: Speak to a ROBS Consultant

A financing consultant will usually call you within one business day to make sure you’re a good fit for a ROBS. If you qualify, the consultant will then arrange a time for a longer, more detailed call.

If you’d like to move forward after this call, you will be asked to provide information on your retirement plan and business. This is basic information with no heavy documentation required, as the screenshot below, from Guidant, shows.

Step 4: Pay the ROBS Set Up Fees

Your initial payment to setup your ROBS is due at this stage. You’ll be required to pay the $4,995 setup fee, and the first month’s fee of $139. If you later decide that a ROBS isn’t for you, some providers offer a generous money back guarantee.

For example, through Guidant you will be refunded your setup costs minus any hard costs, such as attorney time and corporate filing fees, which will be deducted from the refund should you choose to back out. Robert Newcomer-Dyer, Sales Manager at Guidant, says about 20% of the total fees, on average, are typically deducted if the customer requests a refund.

Step 5: Establish a C Corporation & File IRS Paperwork

In order to do a ROBS, your business has to be set up as a C Corporation, because the rollover involves a sale of stock to a retirement account. Your provider will typically will submit the required filings with your state in order to set your business up as a C Corp (if it’s not already structured as a C Corp). They will also file all required paperwork with the IRS.

Step 6: Get Questions Answered by Two Independent ERISA Attorneys

Guidant is the only ROBS provider that we know of which provides you with access to independent counsel before or during your ROBS setup. This gives you an opportunity to ask questions and evaluate if a ROBS is a good fit for you. If you use a different provider then you can expect to skip this step.

With Guidant, you’ll typically have two ½ hour consultations with independent ERISA attorneys, at no additional cost to you. ERISA, or Employee Retirement Income Security Act, is the law that regulates ROBS. Some questions to ask the lawyers include:

Do I face an increased audit risk if I do a ROBS?

What happens in the event of an audit?

How much salary do I have to pay myself if I’m doing a ROBS?

How many hours do I have to work if I’m doing a ROBS?

Will my employees be able to purchase stock in the business?

Will my company need to be appraised before stock can be issued?

What will happen to the company retirement account if the business fails?

On rare occasions, the independent counsel will discover something about your business or retirement account that invalidates the deal. In that case, you would get a full refund, says Dyer.

You can learn more about general answers to some of these questions by reading our ROBS Ultimate Guide, but your own personal situation might be different. This is why it’s important to discuss these with independent counsel.

Step 7: Create a New Retirement Plan for the Corporation

When you do a ROBS, a new 401k or profit sharing retirement plan is created under your C Corporation. Your ROBS provider will help you design the company retirement plan. It must be open to all eligible employees, which will be defined differently for everyone based on how you setup your company 401k.

The plan will be held by a third party administrator (TPA), which is an organization you hire to to run most of the day-to-day operations of your 401k plan. Typically, they will offer certain investment funds that your employees can invest their retirement money into. They will work with you to understand what the goals of your retirement plan are.

The TPA will develop default investment funds based off of these goals, but employee’s wanting to customize their investment strategy will go through the TPA directly. Many large banks offer TPA services, and these services are not unique to using a ROBS. You would use a TPA if you offered a 401k plan to your employees without using a ROBS as well.

Step 8: Complete Rollover & Access Funds for Your Business

The final step of setting up a ROBS is the rollover of funds. Your personal retirement funds are transferred into the company retirement plan. Your company retirement plan then purchases shares of stock in the Corporation. From the proceeds of the stock purchase, you can start a new business, buy a business, or use for any business purpose.

ROBS Administration After Setup

You’re not done overseeing your ROBS once it’s correctly set up. You’ll be required to fill out an IRS Form 5500 each year your retirement funds are invested in your business. Depending on your business, these forms could be difficult and time consuming to complete. For a small fee, a ROBS provider, like Guidant, will manage this for you. They’ll take the lead on keeping track of the financial and insurance documentation that’s needed, and then they’ll fill out the form and submit it on your behalf.

Additionally, your employees could become eligible to invest in your company 401k at different times of the year. When you have a ROBS, there could be additional documentation and notices that your employees need to receive when they become eligible. Your provider keeps track of all this for you as well, letting you know when an employee is eligible and giving you the needed tools and information that you are required to provide that employee.

While it may seem difficult to keep track of, and manage, your ROBS as your business moves forward, it’s not. Having the right ROBS provider makes this as simple as possible, leaving you more time to focus on your business.

Why We Recommend Guidant

We recommend Guidant as the best overall ROBS provider for many reasons. Since 2003, more than 11,000 small businesses have trusted Guidant to do a ROBS, totaling over $3 billion in funding. They’re well versed in making sure your ROBS is set up the way it needs to be, and they’ve never had a plan disqualified during an audit.

In addition to the fact that they have so much experience helping small business owners set up a ROBS, there are 3 main advantages to using Guidant:

Excellent Customer Service

You will work one-on-one with a Guidant consultant during the ROBS set up process. Many Guidant consultants have banking experience, have worked for a small business, or owned a small business in the past, so they are well-equipped to answer questions and simplify the process for you.

High Level of Expertise

Guidant completes more ROBS transactions every year (~1,600) than any provider we’ve reviewed. They also have a lower percent of their customers that were audited last year than any other provider, and they’ve never had a plan disqualified during an audit.

All of this points to their long history of experience and high level of expertise in the ROBS space. They’re a provider you can trust to get you off the ground with a ROBS, and then see it through with your business until the end.

Access to Independent Counsel During the Setup Process (No Cost)

Guidant is the only ROBS provider we know of which provides access to independent outside counsel, at no additional cost, during ROBS set up. Independent counsel can help you objectively evaluate the legal and tax risks of a ROBS and determine if it’s a good choice for your business.

To learn more about why we recommend Guidant and how they compare to other ROBS providers, check out our guide on the Best ROBS Providers.

Costs to Setting Up a ROBS With Guidant

Ongoing Monitoring Fees of $139/month(Covers 10 employees, then $3.33/month for each additional employee after 10)

While these fees may seem high, setting up a Rollover for Business Startups with Guidant can actually be much more economical than getting a small business loan. Business loans are debt that you have to pay back, along with interest, bit by bit each month.

Debt servicing, as this is called, can take a huge chunk out of your business revenues. In contrast, a ROBS isn’t a loan. There’s no debt or interest to pay back, so your small business retains more earnings.

Below is a comparison from Guidant that looks at the cost of ROBS versus other types of financing for $125K in business capital. As you can see, the monthly payment for a Guidant rollover is just $119 for a company of 10 people. That’s less than 1/10th of the monthly payment on an SBA loan!

Source: Guidant

There’s no debt or interest to pay back, and if your business grows, the stock that’s in your company sponsored retirement account will also grow. That translates to more retirement savings for you.

So is it too good to be true? Well, just like any other business financing option, ROBS has its own share of pros and cons.

ROBS Pros & Cons

Whether you choose Guidant or another firm to help you setup a ROBS, the risks are similar. The biggest risk, of course, is the loss of your retirement funds if the business fails. This is a scary “what if,” but the thing that many people forget is that the risk of entrepreneurship exists no matter how you finance your business.

For example, if you get a business loan, you typically have to sign a personal guarantee. If the business fails, you could lose your home and other personal assets. With a ROBS, you’re at least not putting any other personal assets at risk.

As with any other type of business financing, we recommend balancing the pros and cons of a ROBS before deciding whether it’s the right choice for you.

Pros of a ROBS:

No income taxes or early withdrawal penalties.

No debt

No loan payments

No credit checks or personal guarantees

Retirement funds can grow in a tax-advantaged account

Cons of a ROBS:

Possibility of business failure and loss of retirement funds

Potential to be audited

Must administer a company retirement plan

Must operate as a C Corporation

The best way to determine if a ROBS is the right choice for you is to talk to a professional ROBS firm like Guidant. Their financing consultants are small business experts, and you get access to independent counsel who can discuss the risks of a ROBS with you in detail.

For Richard Hoad and his wife Jo-Anne, owners of the The Parsonage Inn in Cape Cod, Massachusetts, the risks were worth it. The Hoads did a ROBS with Guidant in 2012 to achieve their dream of owning a bed & breakfast.

Richard said, “My wife and I were relatively confident because the inn was already being run as a business. It was underperforming, but Jo-Anne’s family had run a B&B in the past, so we knew what was involved and how we could make it successful. We put all our eggs in one basket, but the economy was starting to grow, we got the inn for a good price, and we knew what we could do to be successful.”

Four years later, the Hoads have nearly doubled the Inn’s revenues.Richard had some words of advice to offer for other small business owners who may be considering a ROBS:

“Look at your business plan, make it realistic, see what you want to do with the business, and make sure you can achieve it. If the fundamentals of the business are strong and you’re confident in what you can do to add value, that’s what’s important.”

Richard also recommends business owners use the services of a professional firm like Guidant that will walk them through the process. “Guidant was very professional and helped us accomplish our goals, and they continue to do so to this day.”

Bottom Line: How To Set Up A ROBS

If you have at least $50K in your retirement account, doing a ROBS could be the right solution. Setting up a ROBS by yourself correctly can be difficult and time consuming. We recommending using a ROBS provider to help you set it up and manage it to protect your business and prevent any unnecessary fee or tax payments.

We recommend Guidant for their excellent customer service and access to independent counsel. Guidant simplies what could be a complicated process by taking care of the administrative work for you. They can typically get your ROBS setup in about 3 weeks.

About the Author

Jeff White

Jeff White is a staff writer and financial analyst at Fit Small Business, specializing in Small Business Finance. As a JD/MBA, he has spent the majority of his career either operating small businesses (in the retail and management consulting spaces) or helping them through M&A transactions. When he is not helping small businesses, he spends his time teaching his five kids how to become entrepreneurs. Jeff lives in Seattle, Washington.

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